Tax Alert: IRS Releases Draft of Instructions to Form 8938, Specified Foreign Financial Assets Reporting
10/10/2011
As part of the 2010 HIRE Act, various foreign tax reporting and compliance provisions were enacted, including a requirement for taxpayers to report their foreign financial asset holdings if the amounts of those holdings exceeded certain minimum thresholds.
In response to this requirement, the IRS issued Form 8938, Statement of Specified Foreign Financial Assets, in draft form in June of this year, and on September 30, 2011, the IRS released draft instructions. Nominally, Form 8938 is required to be filed with a taxpayer’s 2011 income tax return if the filer is a specified person who owns specified foreign financial assets with a value over the specified threshold. However, the instructions continue the transitional rule that generally defer taxpayers’ obligations to file Form 8938 until the form is finalized.¹
“Specified person” includes:
- U.S. Citizens;
- Resident aliens of the U.S. (for any part of the year); and
- Nonresident aliens who
- Make an election to be treated as a resident alien for purposes of filing a joint return; or
- Are bona fide residents of Puerto Rico (or American Samoa).
In regards to indirect interests, the instructions specify that if you have an interest in a disregarded entity, you have an interest in the foreign financial assets of the disregarded entity. Additionally, in most cases you do not have an interest in foreign financial assets of a partnership, corporation, trust, or estate. However, if you own any part of a grantor trust, you own an interest in its foreign financial assets. And, if you own an interest in any part of a foreign estate or foreign trust, you own an interest in its foreign financial assets if you know or should have known it had an interest in foreign financial assets. If you receive a distribution from the foreign estate or foreign trust, you are considered to have known of its interests in its foreign financial assets.
Domestic entities are not required to file Form 8938 until regulations (or other guidance) are issued.
“Specified foreign financial assets” include:
- Any financial account (e.g., depository account, custodial account, debt or equity interests in the financial institution) maintained by a non-US financial institution (which includes non-U.S. investment vehicles such as foreign mutual funds, hedge funds and PE funds);
- Other foreign financial investments, such as assets held for investment not held in an account maintained by a financial institution, stock or securities issued by non-U.S. persons, interests in other foreign entities, and financial instruments or contracts that have a non-US person as the counterparty.
The “specified threshold requirements” are as follows:
- For unmarried taxpayers and married taxpayers filing separate income tax returns who live in the United States, Form 8938 must be completed if they have either more than $50,000 in foreign financial accounts on the last day of your tax year or if they had more than $100,000 at any time during the tax year. For married taxpayers filing jointly, the amounts double to $100,000 and $200,000, respectively.
- For unmarried taxpayers living outside of the United States who are either bona fide residents of a foreign country (or countries) or satisfy the physical presence test, Form 8938 must be filed if they have more than $200,000 on the last day of the tax year or more than $400,000 at any time during the tax year. For married taxpayers filing jointly, the numbers increase to $400,000 and $600,000, respectively.
Exceptions include:
- Taxpayers who are not required to file an income tax return need not file Form 8938, even if they own specified foreign financial assets with a value over the applicable reporting threshold.
- The financial account is maintained by a U.S. paying agent such as a domestic financial institution, or all holdings in the account are subject to mark-to-market accounting rules for dealers, traders, and other electing taxpayers.
- Additionally, taxpayers are not required to report the specified foreign financial asset if:
- The taxpayer reports the asset on certain other forms that they file with the IRS;
- The taxpayer is treated as an owner of a domestic liquidating trust or a widely-held fixed investment trust and the trust holds the asset;
- The taxpayer is a bona fide resident of a U.S. possession and the asset has certain ties to the US possession; or
- The asset is subject to mark-to-market accounting rules for securities or commodities dealers or other electing taxpayers.
For more information on this and other issues, please contact James Wall, director of International Tax, or your J.H. Cohn professional at 877-704-3500.
¹The reporting requirement technically applies to tax years that begin after March 18, 2011. Thus, taxpayers with tax years ending on or after March 31, 2011 are affected. It is important to note that these filing requirements do not relieve a taxpayer from the obligation to file Report of Foreign Bank and Financial Accounts (FBAR). As with other Foreign Tax Compliance provisions, significant penalties may apply for non-compliance.
James Wall, JD, LLM, is a principal at J.H. Cohn and director of the Firm’s International Tax Services Group. His focus is on U.S. international tax for both inbound and outbound planning, financing, reorganizations, joint ventures, and transfer pricing. He can be reached via email at jwall@jhcohn.com or at 877-704-3500.
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